Shaq’s 75/25 Money Formula: Save Before You Spend

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It is easy to feel tempted to spend part of every paycheck on things you do not truly need. Occasional discretionary buys can be enjoyable, but doing it too often can slow down long-term savings progress.

That is why basketball icon Shaquille O’Neal follows a 75/25 money rule that allows him to enjoy some of his income while setting most of it aside for saving and investing, according to a 2019 interview with The Wall Street Journal. Here is how the approach works and how you might adapt it to your own finances.

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What is Shaq’s 75/25 rule?

The idea behind Shaq’s 75/25 rule is straightforward: save and invest 75% of what you earn, and live on the remaining 25%.

That approach will not fit every household budget. Still, the purpose of a rule like this is to reserve a portion of income for guilt-free spending, while the rest goes toward everyday expenses and investments.

Prioritize an emergency fund

Putting money aside helps ensure you have cash available if a financial emergency arises. Financial advisers generally suggest building enough savings to cover three to six months of essential living expenses and keeping that money easily accessible.

After you have an emergency fund and enough saved for near-term expenses and goals, you can begin investing for medium- and long-term objectives. Emergency savings are meant for immediate needs, so they are usually not best placed in investments designed for higher long-term returns, such as stocks.

Eventually, retirement can bring a lack of steady pay. Social Security may help, but for most people it is not enough to preserve their current lifestyle. An investment portfolio can help bridge the gap between Social Security income and monthly expenses while easing financial stress over time.

How to adapt the 75/25 rule for a normal paycheck

Most people cannot save 75% of each paycheck. Even so, you can review your finances and gradually increase your savings rate. If you do not know how much you save from each paycheck, figuring that out and examining your spending can make it easier to save more.

You can also tailor the numbers to your goals. Some people prefer the common 50/30/20 budgeting approach, which directs 50% of income to needs, 30% to wants, and 20% to investments and debt payments.

Even modest savings can make a difference. If you are saving 10% now, try to raise that to at least 11% next year. It is usually easier to increase savings when starting from a lower rate. Automatic transfers from checking to savings and brokerage accounts can move money out of sight before you have a chance to spend it.

Keeping emergency savings in a high-yield savings account allows your cash to earn interest while it sits there. Some accounts offer annual percentage yields of 3% to 4%, though those rates can change over time.